ASIA PACIFIC MARKET PERSPECTIVE - Q1 2020 - IPE Reference Hub
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
A E W A S I A PA C I F I C M A R K E T P E R S P E C T I VE | Q1 2020
AEW R E S E A R C H
ASIA PACIFIC
MARKET PERSPECTIVE
Q1 2020
P R E PA R E D BY A E W R E S E A R C H | M AY 2 0 2 0 1Prepared by AEW Research, May 2020 This material is intended for information purposes only and does not constitute investment advice or a recommendation. The information and opinions contained in the material have been compiled or arrived at based upon information obtained from sources believed to be reliable, but we do not guarantee its accuracy, completeness or fairness. Opinions expressed reflect prevailing market conditions and are subject to change. Neither this material, nor any of its contents, may be used for any purpose without the consent and knowledge of AEW. BOSTON LOS ANGELES LONDON PARIS DÜSSELDORF HONG KONG SINGAPORE SYDNEY TOKYO | AEW.COM 2
AEW R E S E A R C H A E W A S I A PA C I F I C M A R K E T P E R S P E C T I VE | Q1 2020
Investment Strategy
Operating conditions and the investment outlook in the Asia Pacific region shifted dramatically over the first quarter. The
market had severe restrictions imposed on it to bring the public health crisis of COVID-19 under control, and governments
and central banks announced very large support packages to offset the costs of these restrictions. The current projections
are for a sharp, but short-lived contraction in economic activity, concentrated in the first half of this year, with a resultant
recovery in the second half of 2020 and rebound in 2021. The unknown part of this outlook is the effect any COVID-19
reoccurrence may have, and how disruptive that could be.
In this environment, investors will likely seek an entry discount in order to price that increased uncertainty. For the time
being, most property sellers are waiting to see how this situation evolves. Their holding power will likely withstand most
of the pressure from the occupational markets, and fortunately, banks are being supportive and unlikely to cause any
forced sales.
There continues to be a weight of capital in the region as well. For example, private funds have about $84 billion of dry
powder to invest, and fund closings continue as 2020 progresses. Investors with return-seeking mandates are expected
to act quickly on any reduced priced opportunities. However, travel restrictions that are still in place may complicate due
diligence efforts, requiring an increased reliance on virtual solutions where investors lack established relationships with
local teams or trusted partners.
In the region, AEW targets investments primarily in the office, logistics and business park sectors. We believe occupier
demand for office assets in central locations will be resilient through the current cycle. In the office sector, location and
building quality will be key value drivers for buyers. The increased use of online purchasing and parcel delivery during the
pandemic has stretched logistics providers, with many looking for expansion space. Business parks that house industries
such as technology-related firms, research &development, and media-related businesses are anticipated to benefit from
the online consumption shift.
Long-duration income, in the form of weighted average lease expiry (WALE) or rent rolls with major expiries further out
than the first year or two of holding, will be preferred. There will need to be a deeper analysis of tenant creditworthiness,
as well as, an evaluation of the repayment of any income delayed due to local regulations designed to help businesses
during stay-at-home periods.
While operating conditions will continue to be unusual in the first half of the year, the second half of the year could form
the base from which a recovery will form if the situation stabilizes.
Economy
The economic outlook has changed dramatically since early 2020 as countries implemented the necessary quarantine
and social distancing practices to contain the spread of SARS-CoV-2, and its disease, COVID-191. During the quarter,
normal life was severely disrupted, and economic activity was put on pause, affecting supply chains and consumption
across multiple industries and sectors, causing major effects on financial markets globally. Revised forecasts by the
International Monetary Fund (IMF) in April indicate the global economy will be in a recession in 2020, falling 3.0% year-on-
year, followed by a 5.8% rebound by 2021. Similarly, within Asia Pacific, the regional economy is expected to contract by
1.6% in 2020 before an anticipated sharp recovery of 7.7% in 20212.
Official World Health Organization names for the virus and its disease
1
2
The Asia Pacific forecast is based on views by Oxford Economics
P R E PA R E D BY A E W R E S E A R C H | M AY 2 0 2 0 3AEW R E S E A R C H A E W A S I A PA C I F I C M A R K E T P E R S P E C T I VE | Q1 2020
Asia Pacific is generally ahead of other regions in managing COVID-19. Strict people movement restrictions put in
place early have enabled a flattening of cases in China, Korea, Hong Kong and Australia. The economic trade-off from
managing the spread of the virus is high, with reports of corporate failures, job losses and credit default risks filtering
through. Looking to offset some of these issues are generous support packages by governments and policy makers,
which include variations of cash handouts, tax rebates, wage subsidies and access to cheap financing. In addition, labor
laws in countries like Korea and Japan make it difficult for companies to dismiss workers, which could help keep jobless
rates low.
Today, China serves as a good example of the effectiveness of severe people movement restrictions, with the potential
to revert to normal operating conditions relatively swiftly once new case numbers are brought down. High frequency
indicators in China such as coal consumption, traffic congestion and housing sales indicates that businesses are running
at close to normal levels again. Additionally, March data for industrial value-add, investment and retail sales show the
declines are slowing down (after some cities had lockdowns lifted), suggesting a recovery is underway. This has laid out
an optimistic trajectory for other countries in the region for when their restrictions are eventually unwound, although the
rebound and recovery of Asia Pacific will be tied to an overall improvement in global demand.
Our base case assumes a phased unwinding of restrictions across Asia Pacific from May to August and for global travel
to remain restrictive till the end of 2020. Once economic activity resumes to near-normal, we expect a second phase
of government spending to support the recovery in 2021, likely through sustained tax cuts, investment in new industry
and accelerated infrastructure projects. Monetary policy is expected to remain supportive for years. To date there have
been multiple rate cuts across the board in the major Asia Pacific economies, and some central banks (i.e. Reserve Bank
of Australia and Bank of Korea) have embarked on their own version of quantitative easing. The risk to this outlook is
more COVID-19 outbreaks later in the year that require another round of strict social distancing or people movement
restrictions.
As large currency movements are common in times of uncertainly, some central banks have established USD swap
facilities with the Federal Reserve. This action has helped calm some weakness in Asian currency markets seen in the
first three months on the year. The AUD has appreciated by 13.0% against the USD to-date3 since the swap facility was
established on 20 March 2020. As of April 30, the AUD was still the weakest currency to-date (down 6.9%), followed by the
KRW and SGD (both down 4.9%). Meanwhile, the CNY has been relatively stable, as the PBOC has worked to maintain the
yuan at strong levels, as the expense of competitive devaluation.
MACROECONOMIC INDICATORS
Countries GDP (y-o-y) CPI (y-o-y) Interbank rate/cash rate USD exchange rate
Year 2020 2021 2020 2021 2020 2021 2020 2021
Australia -7.7 9.6 -14.91 17.97 0.25 0.25 0.63 0.69
China 0.8 8.5 -1.48 11.46 1.60 2.78 6.99 6.90
Hong Kong -6.0 6.6 -9.79 11.67 1.00 1.00 7.75 7.76
Singapore -5.1 6.9 -3.86 7.15 1.15 1.56 1.40 1.33
S. Korea -1.0 3.5 -1.27 3.66 0.50 0.75 1,206 1,169
Japan -4.8 3.9 -4.05 2.32 -0.06 -0.05 106.0 106.0
Source: Oxford Economics, 30 April 2020
3
20 March to 30 April 2020
P R E PA R E D BY A E W R E S E A R C H | M AY 2 0 2 0 4AEW R E S E A R C H A E W A S I A PA C I F I C M A R K E T P E R S P E C T I VE | Q1 2020
Tokyo TOKYO MULTIFAMILY OCCUPANCY AND RENTS
2006 TO 2019
Multifamily remains defensive, office demand holds in
Q1, but expected to slow 20 100%
Ave Rent JPY per tsubo (000's)
80%
MULTIFAMILY: OCCUPANCIES STABLE AND RENTS INCREASE 15
The multifamily sector in Japan is recognized for its stability and
Occupancy
60%
10
defensive nature. Drawing on the previous downturn in 2008 as
40%
an example, residential occupancy remained steady, while rents
5
underwent only a marginal decline. For Q1 2020, residential rents 20%
continued to increase, bringing the year-on-year increase to 5.8% in 0 0%
2011
2012
2013
2015
2010
2016
2017
2014
2018
2019
Tokyo’s 23 Wards. In the Central 5 Wards (with smaller units popular
2006
2007
2008
2009
with young adults and foreigners), rents have increased by 5.4% year-
Rent (left-axis) Occupancy (right-axis)
on-year.
AEW continues to monitor this sector closely especially under the
premise of a slowdown in corporate activity and falling labor demand.
C5W PRIME EFFECTIVE RENTS & VACANCY
Reduced migration to Tokyo may reduce renter demand in the short- 2012 TO 2021
term. Further, with residential rents at an all-time high, there could
be resistance to further increases. 40 10
9
35
Rent (JPY per tsubo, 000's)
OFFICE: RENTS REMAIN FIRM AS VACANCY TIGHTENS 30
8
7
As of end Q14, office leasing markets in Japan were relatively
Vacancy (%)
25
6
unaffected by the impact of COVID-19. Office demand in Q1 was 20 5
similar to levels seen in the same quarter last year. Tenant relocation 15
4
and renewals continued as planned, aside from a handful of smaller- 10
3
2
sized companies that have reduced space requirements. Vacancy 5
1
remains extremely low in Tokyo and further vacancy tightening was 0 0
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
reported at the end of February.
Rent (JPY per tsubo) Vacancy Rate
SUPPLY PEAK IN 2020, RENTAL WEAKNESS COULD SET IN H2
The initial optimism in the office leasing market is unlikely to last
for the remainder of 2020 as business confidence has been severely
impacted since the State of Emergency was declared by the TOKYO OFFICE GRADE A NEW SUPPLY
2019 TO 2023
government in early April. Further, new supply is expected to peak
in 2020 with about 10.3 million square feet completing. As of writing
3.8%
in late April, AEW understands that about 95% of the new space is 12 4.0%
3.3%
3.5%
committed and tenants intend to take occupation of their space.
Square Feet Millions
10
3.0%
8 2.3%
We expect landlords to be accommodative in the near-term, 2.5%
6 2.0%
supporting the lease-up of the backfill space, with smaller-sized, 1.2% 1.2%
1.5%
Grade B buildings expected to see the largest downward rental 4
1.0%
adjustments in 2020. Beyond this period, however, medium-term 2
0.5%
supply will only be completed from 2023 to 2024, which means a 0 0.0%
2019 2020 2021 2022 2023
space shortage could re-surface in the 2021 to 2022 window, giving
opportunity for the market to rebalance. New supply Stock I ncrease
Sources: ARES and PMA, as of March 2020
4
Prior to Prime Minister Shinzo Abe’s announcement on 7 April for a month-long State of
Emergency in Tokyo
P R E PA R E D BY A E W R E S E A R C H | M AY 2 0 2 0 5AEW R E S E A R C H A E W A S I A PA C I F I C M A R K E T P E R S P E C T I VE | Q1 2020
Seoul OFFICE VACANCY RATE BY SUBMARKET
2015 TO 2023F
Limited impact on office environment from COVID-19
in Q1, outlook varies by submarket 25%
20%
DEMAND HOLDS IN Q1, OUTLOOK ACROSS SUBMARKETS VARY
15%
With no widespread lockdown implemented to-date, the day-to-day
business environment was left relatively undisturbed in Seoul. This 10%
has been reflected in the leasing markets where demand in Q1 was
5%
healthy. Net absorption was up in all three submarkets resulting
in vacancy rates declining across the board. The outlook across 0%
submarkets, however, is mixed due to supply factors and variations
in underlying tenant-profile. We expect the technology-dominated CBD Gangnam Yeouido
Gangnam district to hold up best due to favorable demand and
supply trends in 2020 while rental weakness in CBD and YBD could
set in as early as Q2 2020.
SUPPLY OUTLOOK BY SUBMARKET
CBD: DEMAND COULD TAPER IN H2 2020 TO 2024F
While leasing figures for Q1 were positive, we expect some
weakness to set in over the coming months as industries hard-hit 4
Square Feet NLA (Millions)
by the COVID-19 disruption (such as tourism, transportation and
manufacturing) start to cut costs. Estimates suggest these industries 3
account for 25% of the tenant base in the CBD. Further with new
construction, vacancy rates are expected to rise by end-2020. In the 2
CBD, some interruptions to fit-out and refurbishment works could
delay the movement of tenants into new premises, and a result, 1
vacancies could remain elevated for some time. Current forecasts
0
suggest rental weakness in the remainder of 2020, before the 2020 2021 2022 2023 2024
economic recovery in 2021 supports leasing momentum again.
CBD Gangnam Yeouido
YEOUIDO: SUPPY-LED RENTAL WEAKNESS TILL 2021
The completion of the ParcOne will result in a supply-led rental
correction in Yeouido. AEW understands that it could take several
years for the market to rebalance, like when International Finance OFFICE RENTAL OUTLOOK
Q4 2019 = 100
Center Seoul completed. As a result, rental weakness is expected
to be protracted, with effective rents declining by a total of 8.5%
110
between 2020 and 2021.
105
GANGNAM: LANDLORD FAVOURABLE CONDITIONS PERSIST
100
Limited vacancy and expansion of firms in the Information,
Technology and Communication (ITC) industry is expected to 95
continue amidst this period and keep leasing markets in favor 90
of landlords. Brokers on-the-ground have indicated some firms
85
are already enquiring about leasing space in 2021’s supply. Given
the still-healthy demand, rents are expected to hold in 2020 for
several buildings, with only a handful (those with higher vacancies)
CBD Gangnam Yeouido
experiencing a mild contraction in rents.
Sources: JLL, as of March 2020
P R E PA R E D BY A E W R E S E A R C H | M AY 2 0 2 0 6AEW R E S E A R C H A E W A S I A PA C I F I C M A R K E T P E R S P E C T I VE | Q1 2020
China GROSS LEASING VOLUME, SHANGHAI & BEIJING
Q1 2017 TO Q1 2020
Stability in some submarkets, large supply impedes rental
recovery in others 1.4
1.2
Square Feet NLA (Millions)
WEAK Q1 CHINA-WIDE, GRADUAL IMPROVEMENT EXPECTED
1.0
Through the seasonal slowdown of Lunar New Year and subsequent 0.8
lockdown across China due to COVID-19, office leasing demand was 0.6
severely impacted in Q1. Tenants generally became conservative 0.4
on leasing strategies, and where possible, reduced their space 0.2
requirements. At the same time, landlords were highly flexible in 0.0
negotiations, offering discounts, larger rent-free incentives or rent
deferrals. As life returns to normal in China (lockdown restrictions
started to be removed by late March 2020), we expect leasing Beijing Shanghai CBD
volumes to gradually improve through the year. Several high supply
markets could see construction delays which could help markets
PUDONG CBD NEW SUPPLY AND VACANCY RATE
rebalance sooner than expected. 2016 TO 2023
SHANGHAI 3.0 16%
Square Feet NLA (Millions)
CBD: SHORT-TERM WEAKNESS, FAVOURABLE OUTLOOK 14%
2.5
Demand in the CBD was negative 137,000 square feet in Q1, resulting 12%
2.0
in the vacancy rates increasing slightly to 10.6%. While demand is 10%
expected to gradually improve in the coming months, uncertainty 1.5 8%
in the business environment will keep new demand limited causing 6%
1.0
vacancy to stay high for some time. 4%
0.5
2%
Aside from the near-term challenges, the government has not slowed
0.0 0%
down its efforts in promoting Shanghai as an international financial 2016 2017 2018 2019 2020 2021 2022 2023
hub. On April 1, 2020, all foreign ownership caps on finance firms
Supply Vacancy Rate
were removed allowing them to have wholly-owned entities on the
mainland, of which several firms took advantage, (i.e. Morgan Stanley,
Goldman Sachs). As foreign finance firms grow their presence on
OFFICE RENTAL OUTLOOK
the mainland, we expect Liujiazui to benefit as it remains the choice
Q4 2019=100
location for firms in the financial sector. Further, no new supply in the
market for the next five years will help support the submarket’s rental 110
recovery. 105
100
BEIJING
95
LARGE SUPPLY IN CBD, RENTAL STABILITY IN SOME MARKETS
90
Leasing transactions were down around 60% from the same period
85
last year and AEW understands several expansion and relocation
80
plans have been delayed. As a result, overall rents declined by 2% in
Q1. Still, industries that have stayed resilient through this period are
expected to contribute to expansion demand in the coming months. Pudong CBD Shanghai Decentralized Beijing
These include gaming, online education and biomedical. Due to
the large expected supply in Guomao, where 6.5 million square feet
will complete in 2020, overall rental weakness could stay until 2021. Sources: JLL, as of March 2020
Submarkets like East 2nd Ring Road and Finance Street that have
low vacancy and historically low volatility should fare better.
P R E PA R E D BY A E W R E S E A R C H | M AY 2 0 2 0 7AEW R E S E A R C H A E W A S I A PA C I F I C M A R K E T P E R S P E C T I VE | Q1 2020
Hong Kong OFFICE VACANCY AND RENTAL CHANGE
Q1 2020
Commercial market downcycle further amplified by COVID-19
15%
FURTHER PULL BACK IN DEMAND DUE TO DOWNSIZING 10%
Leasing demand in 2019 had already receded from the effects of the
5%
trade war, fall in demand from mainland Chinese firms and months of
0%
social unrest. The outbreak of the virus has continued to bring leasing
-5%
volumes down in Q1, this time with the impact extending to the more
-10%
resilient submarkets like Hong Kong East. New leases that were signed
-15%
(mostly renewals) were negated by multiple cases of downsizing and
-20%
surrendering of space, resulting in negative take-up of 743,000 square Central Wanchai/ HK East Tsimshatsui Kowloon E.
Causeway B.
feet for the quarter. As a result, vacancy levels have increased across the
board, with the largest increases in Wanchai/Causeway Bay and Tsim Current Vacancy Rate Vacancy Rate Mar 2019 Rental change from peak
Sha Tsui. The co-working sector has also been negatively impacted.
AEW is aware of three leases that a major coworking conglomerate
withdrew from in Q1.
YEARLY OFFICE DEMAND
RENTAL DECLINE MAGNIFIED, RECOVERY POTENTIAL BY 2022 2018 TO 2023
Rents in Hong Kong further extended their decline in Q1, falling in the
quarter by 6% island-wide and about 10% in Central. Rents to-date have 3.5
Square Feet Millions (NLA)
3.0
fallen by 10% to 15% in the core submarkets since their peak in Q1 2019. 2.5
The expectation is for the leasing market to continue to be weak for the 2.0
remainder of year, with further contraction of space expected. By end 1.5
1.0
2021, rents in Central could have reached HKD83 to 85 per square foot,
0.5
like levels last seen in 2014. 0.0
-0.5
SOME SMALLER DEALS TRANSACTING AT DISCOUNTS -1.0
While there have been limited transactions for large enbloc deals to- -1.5
2018 2019 2020 2021 2022 2023
date, there has been a noticeable uptick in smaller-sized strata-titled
Hong Kong East Kowloon East Core Office Markets
deals on the market, some transacting at discounts of between 10% to
15% from asking price. Buyers are mostly domestics; local families or
high net worth individuals.
COMMERCIAL RENTAL OUTLOOK
RETAIL AND TOURISM REPORT LARGEST DECLINES IN Q1 Q4 2019= 100
With significant disruption to tourism and consumption-related 105
activities, the tourism and the retail industry have had the largest 100
setbacks. Tourist arrivals fell about 96% year-on-year in February while 95
90
retail sales volume declined 46% for the same period. Store closures
85
and layoffs are expected to continue through the year, despite major
80
government relief packages. A survey by the Hong Kong Retail 75
Management Association indicated that an estimated 10,400 workers 70
65
will lose their jobs, while 5,200 stores could close their doors by the end
60
of May 2020. As a result, more leases are being renewed on a short-
term basis and at significant discounts (between 40 to 50% lower).
Retail yields are being adjusted to reflect the significant alteration to Office Retail Mall/Shopping Centre Unit Shops
the rental outlook.
Sources: JLL, as of March 2020
P R E PA R E D BY A E W R E S E A R C H | M AY 2 0 2 0 8AEW R E S E A R C H A E W A S I A PA C I F I C M A R K E T P E R S P E C T I VE | Q1 2020
Singapore CBD OFFICE NET ABSORPTION
Q1 2017 TO Q1 2020
Disruption to daily-life, short-term income impairment for
commercial real estate 900
800
Square Feet NLA (000's)
OFFICE DEMAND UNEVEN IN Q1 700
Leasing sentiment fluctuated in the weeks pre- and post Lunar New 600
500
Year, but generally turned down in March after stricter safe distancing
400
measures were implemented nationwide. Leasing enquiries fell 300
considerably as in-person viewings were avoided. Companies became 200
focused on contingency management, making cost optimization a 100
0
priority and delaying non-essential business decisions.
SHORT-TERM RENTAL DECLINE, GOVERNMENT SUPPORT
Demand for 2020 is now expected to contract between 350,000 to
500,000 square feet, potentially bringing vacancy up to 7.7% by year-
end, slightly above the long-term average of 6.6%. As demand levels fall
and landlords offer greater flexibility on leases, we expect office rents CBD OFFICE NET SUPPLY, DEMAND & RENTS
2017 TO 2023F
to decline by between 12% to 15% in 2020. Behind some of the impact
to office rents are newly- legislated government policies requiring 2.5 14
landlords to offer rental rebates or deferrals (of up to six months) to
SGD per square foot per month
2.0 12
Square Feet NLA (Millions)
tenants. At the same time, property tax rebates are being offered
1.5 10
to landlords. Current estimates indicate that about 40% of small-to-
medium enterprises and 20% of multi-national companies have applied 1.0 8
for these concessions. 0.5 6
0.0 4
GOOD FUNDAMENTALS TO SUPPORT RECOVERY BY 2021
-0.5 2
Despite the short-term weakness from COVID-19, medium-term
demand-supply fundamentals in the office market remain in favor of -1.0
2017 2018 2019 2020 2021 2022 2023
0
landlords. Assuming economic conditions stabilize H2 2020, projections
are for a turnaround in office rents as early as H1 2021. Rents could Net Supply Demand Rent
potentially rebound by 13% to 18% recovering lost value by mid-2022.
The five-year net supply outlook is in balance with demand levels and
will help support a gradual recovery in rents. COMMERCIAL RENTAL OUTLOOK
Q4 2019= 100
STRUCTURAL WEAKNESS IN RETAIL TO REMAIN PAST COVID-19
The structural weakness in the retail sector has been exacerbated by 125 110
social distancing and government mandated closures of non- essential 120
105
115
businesses. Despite some support by the government to businesses 110 100
Retail Index
Office Index
most severely affected, AEW expects many tenant defaults and 105
95
100
permanent store closures of smaller businesses as cashflows dry up.
95 90
Through this period, we expect malls in the city fringe to see larger 90
85
rental declines of up to 10% versus suburban malls (about 5%) due to 85
80 80
spending support from the residential catchment. Post COVID-19,
we expect retail rents to stabilize, but it could take years before rents
recover to pre-crisis levels. Office Prime Retail Suburban Retail
Sources: JLL, as of March 2020
P R E PA R E D BY A E W R E S E A R C H | M AY 2 0 2 0 9AEW R E S E A R C H A E W A S I A PA C I F I C M A R K E T P E R S P E C T I VE | Q1 2020
Australia
NET RENT & INCENTIVES OUTLOOK
Office demand to fall significantly in 2020, landlords increase 2019 T0 2021
incentives to support occupancy
33%
1400 32% 35%
AUD per sqaure meter p.a .
28% 29%
PULL BACK IN OFFICE DEMAND, LANDLORDS FLEXIBLE IN 2020 1200
26% 27%
28% 30%
The impact of COVID-19 on leasing markets became noticeable in mid- 1000 21%
23% 25%
Incentives
March and will continue to affect leasing volumes in Australia for the next 800 20%
year, especially as the nationwide lockdown continues. By end Q1, leasing 600 15%
volumes were generally down 90%, and many tenants had already 400 10%
started asking for short-term renewals (i.e. one to two versus the typical 200 5%
five years) and larger rental discounts. While landlords have generally 0 0%
avoided giving rebates or discounts in Q1, we expect these to become
Sydney CB D North Sydney Melbourne CB D
common in coming months in the form of tenant incentives as was the
case in previous cyclical downturns. Net Rent Incentives
SYDNEY
INCENTIVE LEVELS TO INCREASE IN 2020 MELBOURNE DEMAND, SUPPLY, VACANCY RATE
2014 TO 2023F
Current low vacancy levels in the CBD will serve as a buffer for the large
pull-back in demand that is expected in 2020. Nevertheless, landlords
4.0 12%
Square Feet NLA (Millions)
are expected to be flexible on lease terms through this period as they
3.5
attempt to maintain occupancy. Incentive levels in the CBD are expected 3.0
10%
to increase by 5 to 10 percentage-points over the course of the year, while 8%
Vacancy Rate
2.5
net face rents are expected to remain flat. 2.0 6%
1.5
4%
Future new construction in the CBD (average 1.5 million square feet per 1.0
2%
annum from 2021 to 2024) will remain a challenge once the economy 0.5
recovers. However, government efforts to fast track infrastructure 0.0 0%
projects, and the possible expansion of workplace ratios, should help to
create new sources of absorption. Supply Demand Vacancy Rate
SYDNEY METRO MARKETS TO HOLD UP BETTER
Outside the CBD, smaller commercial precincts generally have clusters OFFICE RENTAL OUTLOOK
of more defensive industries that could result in these markets emerging Q4 2019=100
from the COVID-19 induced downturn better. For example, North
Sydney and Pyrmont are technology-rich districts, Macquarie Park holds 105
numerous biomedical and pharmaceutical firms, and Paramatta is 100
predominately government-related. Net effective rents in these markets
95
are expected to decline in 2020 but could recover as early as H1 2021.
90
MELBOURNE CBD
VACANCY TO RISE IN 2020, IMPACT ON SECONDARY SPACE 85
New supply in Melbourne’s CBD will peak in 2020 with about 3.5 million 80
square feet of space completing (95% pre-committed). The assumption
of the take-up of backfill space was initially positive, but this has since
been unwound as new sources of demand have dropped. While prime Sydney CB D North Sydney Melbourne CB D
vacancy levels should be manageable, we expect secondary vacancy to
increase by year-end, due to the substantial unleased backfill space. Like
Sources: JLL, as of March 2020
Sydney, face rents are expected to hold flat in 2020 while incentives could
increase by 5 (prime) to 10 (secondary-grade) percentage-points in 2020.
P R E PA R E D BY A E W R E S E A R C H | M AY 2 0 2 0 10AEW R E S E A R C H A E W A S I A PA C I F I C M A R K E T P E R S P E C T I VE | Q1 2020
Capital Markets CUMMULATIVE TRANSACTION ACTIVITY
2016 TO Q1 2020
SLOW START TO THE YEAR
With people movement restrictions in place across several countries 140
and investment decisions generally getting delayed, a drastic 120
slowdown in real estate purchasing activity was expected. Income 100
producing transaction volumes as of the end of March 2020 were
USD Billions
80
down 63% compared to the same period last year for the major Asia
60
Pacific countries. While no market was spared, evidence pointed
40
to relatively healthy levels of activity in Seoul and Tokyo, markets
typically dominated by domestic investors. Interestingly as well, even 20
though Seoul recorded a year-on-year decline of 30% in terms of USD 0
volumes, in terms of the number of deals, the decrease was a mere
6%, indicating an affinity for smaller-sized deals during this period of 2020 Y TD 2019 2018 2017 2016
uncertainty.
Despite the slowdown in transaction activity, there were several TRANSACTION VOLUME BY MAJOR MARKET
noteworthy deals announced in Q1 such as LG Twin Towers in Beijing; Q1 2020 VS Q1 2019
The Rialto in Melbourne; and Otemachi Park Building in Tokyo. These
Brisbane
transactions were already in negotiation for several months, prior to the
Singapore
outbreak of COVID-19.
Melbourne
Hong Kong
BUYERS ON THE SIDELINES, DEBT REMAINS AFFORDABLE
Osaka
Following the weak figures up to March, investment volumes are
Sydney
expected to improve H2 onwards, with parts of Asia Pacific hopefully Shanghai
past the worst of the virus outbreak. Further, there are many eager Beijing
buyers waiting on the sides with an estimated $84 billion in dry powder To kyo
from private funds in the region. Looking at larger sized deals (i.e. above Seo ul
0 2 4 6 8 10
$50 million) as of the end of Q1, there were close to 30 deals amounting USD Billions
to $7.3 billion in value that were at the “pending stage”. We expect a
2020 Same Period 2019
large proportion of these to translate to actual deals in the coming
quarters.
Debt financing continues to be attractive as central banks across the Source: RCA, as of Q1 2020
Note: Transaction volumes in charts above include
region lowered base rates and encourage lending. AEW understands only income producing assets in the following
markets: Beijing, Brisbane, Hong Kong, Melbourne,
while lenders have generally become more stringent for specific Osaka, Seoul, Shanghai, Singapore, Sydney and Tokyo
sectors like hotels or retail, they remain accommodating on others.
Further, sponsors with existing banking relationships and good track
records are viewed more favorably.
EXPECT PRICING ADJUSTMENT IN SOME MARKETS
Based on deals concluded in Q1, no major pricing adjustments were
noticeable in the primary markets. However, as landlords get more
clarity on revised rental income assumptions in the near-term, we
could see some downward adjustments in the coming months. In
some markets where fundamentals remain solid (i.e. Singapore, Japan),
cap rates are expected to hold steady or could even compress as the
income impairment is expected to be short-lived, and the market could
revert to normal operating conditions by 2021.
P R E PA R E D BY A E W R E S E A R C H | M AY 2 0 2 0 11You can also read
